Value of Qantas air fleet in doubt
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Value of Qantas air fleet in doubt
Mon "Sydney Morning Herald"
Value of Qantas air fleet in doubt
Scott Rochfort
July 10, 2006
THE price of oil may not be Qantas's only major financial headache at the moment. A broker has raised concerns that the airline could be forced to massively write down the value of its fleet of 213 aircraft.
With the recent rise in fuel prices putting further pressure on Qantas's profit outlook, there is speculation the carrier may soon have to cut the value of the aircraft on its books, which by some estimates is around $3 billion more than market value.
Referring to the 2004 annual report in which Qantas reported the $9.4 billion value of its fleet was $2.6 billion above market value, a recent Macquarie Equities note said the carrier's weak profit outlook "could challenge in-use valuations" if this continued.
Qantas has provided no valuation of its aircraft in its 2005 report but Macquarie analyst Paul Huxford estimates the gap could be about $3 billion, given the rise in the Australian dollar.
"The justification for the higher carrying value was supported by 'in-use valuation'," Mr Huxford said in a note. "However, over the longer term, it is possible that the carrying value of the aircraft could be reduced."
Mr Huxford said "it might not be unrealistic to suggest that as a result of changing market conditions for oil and [foreign exchange] rates over the medium term" that Qantas could accelerate the depreciation of its aircraft or opt for a massive write-down.
The airline could have an even tougher time justifying the book value of its planes, given Qantas has a much older and less fuel efficient fleet than many of its competitors such as Virgin Blue, Singapore Airlines and Emirates.
Qantas's apparent fleet over-valuation also appears to have blown out in recent years.
In its 2001 report, the airline undervalued its fleet by $1.7 billion against market value.
Mr Huxford was the first analyst to predict the massive non-cash write-down in Qantas's frequent-flyer scheme last year.
Due to the introduction of International Financial Reporting Standards, Qantas had to write down the value of its loyalty scheme by $749 million in June 2005.
Thanks largely to the recent lift in oil prices, the market expects Qantas will report a 27 per cent dip in full-year net profit to $560 million next month.
The coming year is looking even tougher, with analyst consensus tipping a $520 million net profit in 2006-07.
Qantas has warned it expects its fuel bill to rise a further $1 billion this fiscal year.
The airline's share price is set to be tested today, after oil prices hit new highs in New York markets at the weekend.
Continuing geopolitical concerns over North Korea and Iran helped oil reach a high of $US75.78 per barrel in New York.
It closed $US1.05 lower at $US74.09 per barrel.
===============================================
Value of Qantas air fleet in doubt
Scott Rochfort
July 10, 2006
THE price of oil may not be Qantas's only major financial headache at the moment. A broker has raised concerns that the airline could be forced to massively write down the value of its fleet of 213 aircraft.
With the recent rise in fuel prices putting further pressure on Qantas's profit outlook, there is speculation the carrier may soon have to cut the value of the aircraft on its books, which by some estimates is around $3 billion more than market value.
Referring to the 2004 annual report in which Qantas reported the $9.4 billion value of its fleet was $2.6 billion above market value, a recent Macquarie Equities note said the carrier's weak profit outlook "could challenge in-use valuations" if this continued.
Qantas has provided no valuation of its aircraft in its 2005 report but Macquarie analyst Paul Huxford estimates the gap could be about $3 billion, given the rise in the Australian dollar.
"The justification for the higher carrying value was supported by 'in-use valuation'," Mr Huxford said in a note. "However, over the longer term, it is possible that the carrying value of the aircraft could be reduced."
Mr Huxford said "it might not be unrealistic to suggest that as a result of changing market conditions for oil and [foreign exchange] rates over the medium term" that Qantas could accelerate the depreciation of its aircraft or opt for a massive write-down.
The airline could have an even tougher time justifying the book value of its planes, given Qantas has a much older and less fuel efficient fleet than many of its competitors such as Virgin Blue, Singapore Airlines and Emirates.
Qantas's apparent fleet over-valuation also appears to have blown out in recent years.
In its 2001 report, the airline undervalued its fleet by $1.7 billion against market value.
Mr Huxford was the first analyst to predict the massive non-cash write-down in Qantas's frequent-flyer scheme last year.
Due to the introduction of International Financial Reporting Standards, Qantas had to write down the value of its loyalty scheme by $749 million in June 2005.
Thanks largely to the recent lift in oil prices, the market expects Qantas will report a 27 per cent dip in full-year net profit to $560 million next month.
The coming year is looking even tougher, with analyst consensus tipping a $520 million net profit in 2006-07.
Qantas has warned it expects its fuel bill to rise a further $1 billion this fiscal year.
The airline's share price is set to be tested today, after oil prices hit new highs in New York markets at the weekend.
Continuing geopolitical concerns over North Korea and Iran helped oil reach a high of $US75.78 per barrel in New York.
It closed $US1.05 lower at $US74.09 per barrel.
===============================================
There is another reason QF's fleet could be written down - maintenance and modifications. There is a huge difference in value between a clapped out aircraft that has been minimally (but legally) maintained and one that has had heaps of modifications during its life to improve its serviceability and/or performance.
Ansett in the old days had this down to an art form, although this was as much about hiding profits as anything (ie doing a mod that improved capital value, but of course charging it as an "expense")
A case in point were the DC-9's that Ansett sold to Evergreen. Uncles Peter and Rupert did rather well out of that.
Woops! I forgot to add the necessary quote from Geoff Dixon "If our aircraft are written down then we will have to cut costs further."
Ansett in the old days had this down to an art form, although this was as much about hiding profits as anything (ie doing a mod that improved capital value, but of course charging it as an "expense")
A case in point were the DC-9's that Ansett sold to Evergreen. Uncles Peter and Rupert did rather well out of that.
Woops! I forgot to add the necessary quote from Geoff Dixon "If our aircraft are written down then we will have to cut costs further."
Geeezuz .... talk about trying to have it both ways. GD has gone public on many occasions as saying that 'the return on capital is insufficient' and using that as the justification to drive down costs. Well if the value of the capital is decreased, the percentage return increases and therefore reduces the need for cost cutting. 
Qfcainer, I have absolutely no idea if Qf is up to date with modifications. I'm sure that it meets all the legaly required maintenance standards.
However there is a constant stream of "optional" updates and mods that either improve maintainability, serviceability, or both.
The classic example of this would be the replacement of a part with a modified one that thereby frees maintenance of a requirement to inspect it every x hrs or cycles.
These are the mods I'm talking about and I have no idea if QF does many of them, but if QF are in cost cutting mode I would suspect that the mod budget would be thin. The net effect of doing lots of them is that, absent major structural checks, your twenty year old aircraft will require roughly the same servicing and line maintenance effort as same model fresh off the production line. That affects the value of the aircraft.
However there is a constant stream of "optional" updates and mods that either improve maintainability, serviceability, or both.
The classic example of this would be the replacement of a part with a modified one that thereby frees maintenance of a requirement to inspect it every x hrs or cycles.
These are the mods I'm talking about and I have no idea if QF does many of them, but if QF are in cost cutting mode I would suspect that the mod budget would be thin. The net effect of doing lots of them is that, absent major structural checks, your twenty year old aircraft will require roughly the same servicing and line maintenance effort as same model fresh off the production line. That affects the value of the aircraft.
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Maybe this is the way Dixon will justify QF fleet replacement with newer and more fuel efficiant jetstar aircraft. By smugly suggesting it's not a transfer of business... It is a group company aiding Qantas in reducing fuel bills...
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I won't worry to much about this. Everything is under control. Don't believe me? If it wasn't the CFO and other Qantas executives would be focused only on QF issues. But they seem to have plently of spare time.....
Quote......
Leighton announced yesterday that Qantas chief financial officer, Peter Gregg, would become a director. He replaces Qantas CEO Geoff Dixon, who resigned from the Leighton board six weeks ago to become a director of PBL where executive chairman, James Packer, is a director of Qantas.
Talk about cosy cross-directorships. This Sydney shuffling is a bit like Melbourne in the bad old days, although it might indicate that Gregg is winning the battle with executive general manager John Borghetti to succeed Dixon when he eventually retires.
Surely Gregg should be too busy to have an outside directorship. It's one thing for a CEO to pick up a board seat as he heads towards retirement – Ted Kunkel at Billabong and Roger Corbett at Fairfax are two examples – but quite another to start landing them before even making it into the top job.
For some strange reason Qantas has been a pioneer of this trend, perhaps reflecting the desires of chairman Margaret Jackson, Australia's board hopper par excellence.
Jackson bailed from her two most disastrous boards, BHP and Pacific Dunlop, on 28 April 2000, the same day she was anointed as Gary Pemberton successor in the chair at Qantas. All this stuff about being too busy looked rather odd when she joined the Gold Coast-based Billabong board ten weeks later – far removed from the painful memories of chairing the audit committees at BHP and PacDun as billions were written off.
Amongst brief stints at John Fairfax and Southcorp, Jackson has also been on the ANZ board continuously for 12 years. Was it Jacko's influence on the ANZ board that saw then Qantas finance director Garry Twomey take up a board seat with the bank in 1999? Twomey was subsequently passed over for Geoff Dixon and defected to Air New Zealand which ended up costing ANZ plenty when Ansett collapsed and caused embarrassment all round. Finance directors have been rare beasts on other boards since all this happened.
Unquote
See nothing to worry about. Our executicves are so competent!!!!!!
Quote......
Leighton announced yesterday that Qantas chief financial officer, Peter Gregg, would become a director. He replaces Qantas CEO Geoff Dixon, who resigned from the Leighton board six weeks ago to become a director of PBL where executive chairman, James Packer, is a director of Qantas.
Talk about cosy cross-directorships. This Sydney shuffling is a bit like Melbourne in the bad old days, although it might indicate that Gregg is winning the battle with executive general manager John Borghetti to succeed Dixon when he eventually retires.
Surely Gregg should be too busy to have an outside directorship. It's one thing for a CEO to pick up a board seat as he heads towards retirement – Ted Kunkel at Billabong and Roger Corbett at Fairfax are two examples – but quite another to start landing them before even making it into the top job.
For some strange reason Qantas has been a pioneer of this trend, perhaps reflecting the desires of chairman Margaret Jackson, Australia's board hopper par excellence.
Jackson bailed from her two most disastrous boards, BHP and Pacific Dunlop, on 28 April 2000, the same day she was anointed as Gary Pemberton successor in the chair at Qantas. All this stuff about being too busy looked rather odd when she joined the Gold Coast-based Billabong board ten weeks later – far removed from the painful memories of chairing the audit committees at BHP and PacDun as billions were written off.
Amongst brief stints at John Fairfax and Southcorp, Jackson has also been on the ANZ board continuously for 12 years. Was it Jacko's influence on the ANZ board that saw then Qantas finance director Garry Twomey take up a board seat with the bank in 1999? Twomey was subsequently passed over for Geoff Dixon and defected to Air New Zealand which ended up costing ANZ plenty when Ansett collapsed and caused embarrassment all round. Finance directors have been rare beasts on other boards since all this happened.
Unquote
See nothing to worry about. Our executicves are so competent!!!!!!
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Dodgy aircraft values aren't the only 'funny' thing to write about. I'd like to know Gregg and Co. can consider VHEBU an active part of the fleet when it's been sitting at Avalon in an unworthy, cannibilised state for many months. Everything Qantas publishes states 6 B747-338's but we all know that there are in reality only 5. Was there ever any intention on Qantas's part to restore this unit to the active fleet? How do they get away with this treatment of the facts?
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[quote]How do they get away with this treatment of the facts?[quote]
Perhaps they have been watching the Federal Government - people like Andrews, Downer and Howard himself have a curious 'interpretation' of facts - it's all in the forehand.
Perhaps they have been watching the Federal Government - people like Andrews, Downer and Howard himself have a curious 'interpretation' of facts - it's all in the forehand.
